A proposed class action against TD Asset Management Inc. (TDAM) over trailer fees paid to discount brokers has been given the go-ahead by an Ontario court.Justice Edward Belobaba of the Superior Court of Justice certified the class action on behalf of investors who purchased TD mutual funds from a discount broker. The suit alleges that investors suffered tens of millions of dollars in losses because the funds paid trailers to firms in part for advice the firms don’t provide.
While trailing commission to full-service firms “made sense” because those firms “were legally permitted to provide investment advice to their clients and have done so,” the ruling said, paying trailing commissions to the discount brokers “made less sense because they were prohibited by provincial securities law from providing investment advice.”
It also noted that securities regulators have recently declared that there’s “no justifiable rationale” for the practice of funds paying trailers to discounters, and that the Canadian Securities Administrators (CSA) are planning to introduce measures to outlaw it.In the meantime, the investor class action will be allowed to proceed.
The allegations have not been proven.The court said TDAM basically argued that the plaintiff doesn’t have standing to bring the class action. It argued that the fund manager is obliged to act in the best interests of the fund, not its unitholders.However, the court rejected the argument, at least at the certification stage.
It said that TDAM may succeed with this argument during a trial but that on a certification motion, it’s not clear that this is the case.“In my view, it is not at all plain and obvious on the facts as pleaded that the plaintiff as unitholder and beneficiary has no right to sue the defendant trustee in respect of the alleged breaches of the prescribed standard and duty of care,” the ruling said.Ultimately, the court found that the plaintiff has a viable claim for breach of trust and fiduciary duty.
Several other claims — for knowing assistance, knowing receipt and unjust enrichment — were ordered struck.A claim of prospectus misrepresentation is also a viable cause of action, the court said, noting that TDAM’s “Fund Facts documents have consistently stated that trailing commissions are paid for the ‘services and advice’ provided by dealers to their clients.”It certified the action to proceed on the claims that it deemed to be viable.
This is the first to be certified in a number of similar class actions against asset managers over trailing commissions to discount brokers.